Reuters: US Dollar Report: FOREX-Euro eases as short-covering momentum fades

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FOREX-Euro eases as short-covering momentum fades Jul 26th 2012, 04:37 Thu Jul 26, 2012 12:37am EDT * Euro faces short-term resistance near $1.2184 * Dollar/yen dips, Japan importers may lend support * Dollar gains may be limited before Fed meeting next week By Masayuki Kitano SINGAPORE, July 26 (Reuters) - The euro gave back some gains on Thursday from a short-covering rally the previous day, as persistent worries about Spain's debt woes cloud the outlook for the single currency. The euro dipped 0. 2 percent to $1.21 34, but stayed above a two-year low of $1.2042 hit on trading platform EBS earlier this week. The daily Ichimoku chart, a popular technical analysis tool, shows resistance for the euro near $1.2184, which is where the Ichimoku chart's tenkan line now lies. The euro rose on Wednesday after European Central Bank Governing Council member Ewald Nowotny said he could see grounds for giving the euro zone bailout fund a banking license that would increase its crisis-fighting firepower. But ECB President Mario Draghi has poured cold water on the idea, while legal problems could also prevent the central bank from allowing the European Stability Mechanism rescue fund to tap liquidity operations. "The fact is the ECB is still quite divided on the issue of giving the ESM a banking license," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. "I think if anything, any bounce that this has induced would be short-lived. I don't see the euro sustaining gains." Sentiment toward the euro remains bearish given spiralling Spanish borrowing costs that have fuelled concerns the country will need a full sovereign bailout. The Spanish 10-year government bond yield fell to roughly 7.40 percent on Wednesday, but is not far away from a euro era high of about 7.75 percent. The euro came under renewed pressure after Spain's heavily indebted eastern region of Valencia said last week it would need financial help from Madrid, highlighting t h e dire fiscal straits of Spain's regions. Still, with the euro having slid roughly 9 percent from a peak hit in May, it may be due for a bounce in the near-term, said a trader for a major Japanese bank in Singapore. "There has been a pretty decent move since May... Timing-wise, it wouldn't be a surprise if the euro were to rise toward $1.24 on short-covering," the trader said. FED MEETING The euro's downside against the dollar may be limited ahead of next week's U.S. Federal Reserve policy meeting, said Credit Agricole's Kotecha. "I think the dollar will find it difficult to make gains, given there is growing speculation that the Fed might take some action next week," Kotecha said. The Fed's remaining policy tools include a third round of quantitative easing in the form of large-scale bond purchases -- known as QE3 -- and lowering the interests it pays banks on excess reserves they leave with the central bank. Speculation about the possibility of the Fed adopting monetary easing steps next week may strengthen if U.S. second-quarter gross domestic product data due on Friday comes in weak, said a trader for a major Japanese bank in Tokyo. Still, the more likely scenario is for the Fed to take more time before taking action, given that the central bank just extended "Operation Twist" in June, the trader said. The Fed last month expanded efforts to keep long-term interest rates low by announcing it would buy an additional $267 billion in long-term bonds while selling short-term securities. T he dollar eased 0.1 percent to 78.1 1 yen, hovering near a seven-week low of 77.94 yen set this week. Dollar demand for Japanese importers may emerge at levels below 78.00 yen and help support the dollar, said t he trader for a major Japanese bank in Tokyo. In addition, the dollar has been supported recently by wariness about potential yen-selling by the Bank of Japan, with some market players saying that a drop below 78.00 yen may he ighten wariness ove r possible in tervention. Link this Share this Digg this Email Reprints

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